Ratings Roundup: Middle East, China Taiping, LAWPRO

March 17, 2010

Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and insurer financial strength ratings on Jordan-based Middle East Insurance Company (MEICO) to ‘BBB-‘ from ‘BBB’. The outlook is stable. The rating action follows the “downgrade on March 12, 2010, of the long-term local currency sovereign credit rating on the Hashemite Kingdom of Jordan (for more information, see “Hashemite Kingdom of Jordan Long-Term LC Rating Lowered To ‘BBB-‘; Long-Term FC Rating Affirmed At ‘BB’; Outlook Stable,” published on RatingsDirect),” S&P explained. “In our opinion, a microeconomic analysis of MEICO still reveals good and potentially improving business and financial profiles,” explained credit analyst David Anthony. However, the current increase in economic and industry risks at the wider, macroeconomic level imply a likely short- to medium-term deterioration in the overall operating and investment environment for all insurers and banks active in Jordan, including MEICO. The stable outlook on MEICO reflects that on the long-term local currency sovereign credit rating on Jordan. “We expect the macroeconomic situation in Jordan to stabilize in the medium term, which will, in our opinion, bring greater stability to the operating environments of the Kingdom’s financial institutions,” Anthony added. In addition to a more stable macroeconomic outlook, we also expect to see reasonable stability and possibly some improvement in MEICO’s already good commercial and financial profiles,” S&P continued. “In particular, we expect MEICO to maintain its position as one of the leading domestic Jordanian insurers with an approximately 6.5 percent market share and particular strength in commercial lines business. Year on year, we expect to see low double-digit increases in net premium volumes, and satisfactory underwriting profits reflected in net combined ratios in the low-to-mid 90 percent range. We also expect to see MEICO continuing to reduce its significant and somewhat opportunistic exposure to equities, allowing the possible realization of some residual investment gains and a further improvement in its already strong liquidity position. Meanwhile we expect capitalization to remain good overall, with at least strong adjusted risk-based capital outcomes, even if small local competitors are periodically acquired. Given the currently challenging macroeconomic environment in Jordan, any upward rating action is unlikely in the short term, although we do not expect any further significant downward pressures either.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and the issuer credit rating of “a-” of China Taiping Insurance (Macau) Company Limited (CTIM). The outlook for both ratings is stable. The ratings reflect “CTIM’s solid risk-based capitalization and strong operating earnings,” Best said. “The affirmation also acknowledges the company’s business profile in regard to a multi-channel distribution network and improved local market presence as a leading insurer from 2008. CTIM has maintained a market leader position in its key segments (including employees’ compensation and fire businesses) through a multiple distribution platform. The company has become the largest non-life insurer from 2008, representing a share of nearly 30 percent of total gross premiums in the local market in 2009. In addition to continued support from China Taiping Group through reinsurance management, CTIM, like other local insurers, has minimal exposure to catastrophic losses in the region, which protects its surplus against significant event losses. The company’s risk-adjusted capital position, as demonstrated by Best’s Capital Adequacy Ratio (BCAR), remained strong in 2009. The company maintains good liquidity relative to risks underwritten. Over 80 percent of total invested assets were held in cash and bonds at year-end 2009.” Best added that it also believes that the company’s risk-adjusted capitalization “will remain solid to support its expected business growth and investment risk. Operating earnings historically have been favorable over the past five years, with the exception of 2008, where investment losses occurred as a result of the economic downturn. Underwriting profitability has been strong, with the combined ratio well below 100 percent during 2005-09. Underpinned by good investment earnings and disciplined underwriting guidelines, CTIM is expected to report a solid pre-tax profit for 2009.” However, the company’s “upward trend in acquisition costs and highly competitive environment in its marketplace” are offsetting factors. Best added that while CTIM’s risk-based capitalization “supports its current ratings, challenging local market conditions impaired business growth in 2008 and 2009. In addition to the uncertainty associated with the momentum of the recovery of local economic conditions, competitive market conditions in the company’s core business lines, coupled with its elevated net commission expenses, could potentially weaken its underwriting profitability going forward.”

A.M. Best Co. has revised the outlook to negative from stable and has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Toronto-based Lawyers’ Professional Indemnity Company (LAWPRO®). Best said the ratings and outlook “reflect LAWPRO’s adequate capitalization and favorable operating performance,” but the “unfavorable loss ratio trend being experienced by the company” is an offsetting factor. LAWPRO is a wholly owned subsidiary of the non-profit regulator The Law Society of Upper Canada. It writes lawyers’ professional liability insurance and title insurance, exclusively and is The Law Society program insurer for Ontario Lawyers. The company’s good operating results are supported by “consistent net investment income and an asset liability matched portfolio,” Best continued. The ratings also reflect LAWPRO’s “access to additional capital sources held by The Law Society in its Errors and Omissions Fund.” However the unfavorable claims development and further deterioration in the company’s combined ratio” are offsetting factors. “These results were due to a one time revaluation of existing reserves by $10.7 million to reflect the anticipated impact of the implementation of a harmonized sales tax in Ontario and a significant decrease in the discount rate, resulting in an increase in claims liabilities,” Best explained. “In addition, increases in loss frequency and severity trends contributed to unfavorable underwriting results. The company’s underwriting results may be further challenged by its exposure to fraud-related claims.” Best also said it is “concerned with the potential for continued deterioration in LAWPRO’s loss ratios as well as frequency and severity trends.”

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